Much of your future retirement income is in other people's hands. The amount -- and very existence -- of your Social Security benefit will depend on how the government attempts to fix the program's looming shortfalls. And if you expect a monthly pension check in your golden years, you may be in for a surprise: Poor investment returns and corporate bankruptcy have jeopardized this one-time cornerstone of retirement. In the end, you can only depend on what you can control: your personal savings.

By Robert Brokamp (TMF Bro)January 21, 2004

We all look forward to the day when we can deposit our duffs on retirement's proverbial three-legged stool: Social Security, a pension plan, and personal savings.

But be careful: The legs of that stool aren't too sturdy.

We all know that the future of Social Security is up in the air, with baby boomers poised to put a strain on those coffers. The program just won't have enough money to cover future obligations.

Unfortunately, the same is being said of more and more traditional pension plans, a.k.a. defined-benefit plans. Last month, Standard & Poor's announced that the pensions offered by the companies in the S&P 500 are underfunded by $259 billion, up from $212 billion a year ago. The bear market of 2000-2002 and historically low interest rates have taken their toll on pension assets, and the stellar stock market of 2003 wasn't enough to compensate for the increased payments pensions will have to pay this year -- a situation that will only get worse as the baby boomers retire.

That shortfall is just for companies in the S&P 500. Nationwide, the government estimates that pensions are underfunded by $350 million.

The pension: an endangered speciesOf course, an underfunded pension is better than no pension at all -- but that's the prospect facing an increasing number of workers. A recent survey by Hewitt Associates (NYSE: HEW) found that unless Congress changes the accounting rules that govern pensions, 21% of companies say they will freeze pension benefits and 17% said they won't offer defined-benefit plans to new employees.

The issue of companies getting "pension relief" is a whole other can of worms, but the fact is that fewer employers are offering defined-benefit plans. According to Hewitt, 83% of employers offered traditional pension plans in 1990. By last year, that percentage had dropped to 45%.

Even if you have a pension, there's no guarantee it'll be around when you retire. Just ask the former employees of Consolidated Freightways, US Airways (Nasdaq: UAIR), or Polaroid. After these companies went bankrupt, they could no longer pay pension benefits. Their plans -- along with the plans of 149 other companies, including, of course, Frosty Morn Meats -- were taken over by the Pension Benefit Guaranty Corporation, a federally chartered agency that essentially insures pensions.

While that sounds reassuring, benefit payments from the PBGC are often lower than what a retiree would have received had the company remained solvent. A Washington Post article from last October told the story of Melvin Schmeizer, a Bethlehem Steel employee for more than 35 years whose monthly pension dropped from $2,850 to $1,700 after the PBGC assumed control of the plan.

Furthermore, the PBGC itself isn't on solid ground. Its fund backing single-employer plans went from a $7.7 billion surplus in 2001 to a $11.2 billion deficit in 2003. The reason: The agency is taking over more plans. Last year, the PBGC assumed control of 152 pension plans (up 5.5% from 2002) covering 206,000 people (up 10.2%). That's the largest annual increase in the total number of people covered by the PBGC. The agency paid a record $2.5 billion in benefits, almost $1 billion more than in the previous year.

In a statement released last week along with the PBGC's annual report, Executive Director Steven A. Kandarian said, "The continued erosion of PBGC's financial condition underscores the need for comprehensive reforms to put pension plans on a path to better funding. While the PBGC has sufficient assets to pay benefits to workers and retirees for a number of years, the growing gap between our assets and liabilities puts at risk the agency's ability to continue to protect pensions in the future."

The one leg leftNow, we don't want to sound too alarmist. Social Security will survive in some form (though future retirees should expect reduced benefits). And most beneficiaries of a defined-benefit plan will get something. Actually, in the short term, it's the investors in companies with huge shortfalls -- such as General Motors (NYSE: GM), Ford (NYSE: F), ExxonMobil (NYSE: XOM), and United Technologies (NYSE: UTX) -- that have the most to worry about, as earnings get gobbled up by pension funding.

But the solvency of Social Security and your pension are ultimately out of your control. The only aspect of your retirement that is truly in your hands is your personal savings. And isn't it smarter to plan for the worst -- or at least not the best?

So if you want to control how and when you retire, you'll have to save early and often. Stuff your 401(k), 403(b), or whatever your employer offers, and max out your IRA. You still have until April 15 of this year to make a contribution for 2003, so don't miss out on that tax-advantaged growth. (Visit our IRA Center for all the details.)

For more on pensions -- and how to see if yours still has a pulse -- read Pension in Trouble? http://www.fool.com/news/commentary/2003/commentary030402bro.htm Furthermore, beginning this year, companies will have to reveal more information about their pensions, including asset allocation, contribution levels, future benefit payments, and investment strategies. So keep an eye on the health of your plan and your company. And if you're ever given the opportunity to get money out of the plan -- such as a lump-sum benefit payment -- give it serious consideration.For his five years of teaching sixth graders, Robert Brokamp will receive $108 a month 32 years from now. And, no, that won't be adjusted for inflation. Which is why he's still working, co-writing The Motley Fool Personal Finance Workbook and writing The Motley Fool's Guide to Paying for School. The Motley Fool is investors writing for investors.